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Concept
Day trading
Summary
Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day's close and the next day's price at the open. Traders who trade in this capacity are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy-and-hold and value investing strategies. Day trading may require fast trade execution, sometimes as fast as milli-seconds in scalping, therefore direct-access day trading software is often needed.
Day traders generally use leverage such as margin loans. In the United States, Regulation T permits an initial maximum leverage of 2:1, but many brokers will permit 4:1 intraday leverage as long as the leverage is reduced to 2:1 or less by the end of the trading day. In other countries margin rates of 30:1 or higher are available. In the United States, based on rules by the Financial Industry Regulatory Authority, people who make more than 3 day trades per 5-trading-day period are termed pattern day traders and are required to maintain 25,000 in their account can buy $100,000 (4× leverage) worth of stock during the day, as long as half of those positions are exited before the market close. Because of the high risk of margin use, and of other day trading practices, a day trader will often have to exit a losing position very quickly, in order to prevent a greater, unacceptable loss, or even a disastrous loss, much larger than their original investment, or even larger than their account value. Since margin interest is typically only charged on overnight balances, the trader may pay no interest fees for the margin loan, though still running the risk of margin calls. Margin interest rates are usually based on the broker's call rate.
Official source
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